Econ Chapter 11
three concepts describe the relationship between output and the quantity of labor employed (input):
(1) total product (TP) (2) marginal product (MP) (3) average product (AP)
example: quantity increases from 1000 to 1800 and total cost increases from 3000 to 5000
(5000-3000)/(1800-1000)= 2000/800= 2.5
what does the total product curve separate
*attainable output* levels from *unattainable output* levels in the short run
-the firm has 4 different plants -each plant has a ________________ ATC curve -the firm can compare the ATC for each output at different _______________
-1,2,3, or 4 knitting machines -short run -plants
for farmer jack the fixed cost is....
-1000 for his land
why is AVC U-shaped
-MP exceeds AP, which brings rising AP and falling AVC -eventually, MP falls below AP, which brings falling AP and rising AVC
how is the ATC curve, AVC curve, and MC curve shaped?
-U-shaped
technology -a technological change that increases productivity will shift the product curve __________ and the cost curves _______________
-a technological change that increases productivity will shift the product curve *upward* and the cost curves *downward*
long run cost -in the long run ________ inputs (factors) are variable and __________ costs are variable
-all, all
prices of factors of production -an increase in the price of a factor of production increases ____________ and _____________________.
-an increase in the price of a factor of production increases *costs* and *shifts the cost curves in the short run*
diminishing marginal returns
-arises because each additional worker has less access to capital and less space in which to work -are so pervasive that they are elevated to the status of a "law" -states that as a firm uses more of a variable input with a given quantity of fixed inputs, the marginal product of the variable input *eventually diminishes*
long run average total cost -LRATC is the relationship between the lowest attainable ________________ and output when the firm can change both the___________ it uses and ___________________
-average total cost, plant, the quantity of labor it employs
the MC curve intersects the ______________ and the _______________ at their minimum points
-average variable cost curve (AVC) and the average total cost curve (ATC)
examples of fixed factors in the short run
-capital, land, and entrepreneurship
diseconomies of scale are due to
-coordination problems in large organizations -when management becomes stretched
a firms production function exhibits
-diminishing marginal returns to labor (for a given plant) -diminishing marginal returns to capital (for a fixed quantity of labor) -for each *plant*, diminishing marginal product of labor creates a set of short run, U shaped cost curves for MC, AVC, and ATC
-economies of scale are features of a firm's technology that lead to ____________ long-run average cost (LRAC) as output increases -diseconomies of scale are features of a firm's technology that lead to ____________ long-run average cost (LRAC) as output increases
-falling -rising
examples of long-run cost
-firms can build more factories, or sell the existing ones -the behavior of long-run cost still depends on the firm's production function -all costs are changeable and can be renegotiated -firms have more control over costs and can adjust the size of production process (scale of production)
constant returns of scale -LRATC stays the same as quantity _______________
-increases
diseconomies of scale -LRATC rises as quantity ____________
-increases
economies of scale -LRATC falls as quantity ____________
-increases
the MC curve -over the output range with *increasing marginal returns,* marginal cost falls as output ____________ -over the output range with *diminishing marginal returns,* marginal cost rises as output _____________
-increases -increases
economies of scale occur when
-increasing production allows greater specialization -workers produce more efficiently when focusing on a specialized task
economies of scale is also called
-increasing returns of scale
examples of variable factors in the short run
-labor, raw materials, and energy
the firm can change to a different factory scales in the ___________, but not in the ______________
-long run, short run
-the long run average cost curve is made up from the ____________ ATC for each output level
-lowest
-the LRAC curve is a _____________ that tells the firm the plant that minimizes the cost of producing a given output
-planning curve
long run average total cost -the LRATC is a _______________. -it tells the firm the _________ and the ___________________ to use at each output level to minimize ______________
-planning curve -plant, quantity of labor, total cost
short run cost and long run cost -the average cost of producing a given output varies and depends on the firm's ___________ -the larger the plant, the _____________ is the output at which ATC is at a minimum
-plant -greater
-once the firm has chosen its ____________, the firm incurs the costs that correspond to the ATC curve for that plant
-plant (scale)
total cost curve
-relationship between output quantity and total cost
-the long run average cost curve is the
-relationship between the lowest attainable average total cost and output when both the plant and labor are varied
a firm can choose from 3 factory scales
-small, medium and large
Decision Time Frames
-some decisions are critical to the survival of the firm -some decisions are irreversible (or very costly to reverse) -other decisions are easily reversed and are less critical to the survival of the firm, but still can influence profit
the position of a firm's *short run cost curves* depends on two factors
-technology -prices of factors of production
the shapes of a firm's *cost curves* are determined by the _______________ it uses, thus are linked to shapes of _______________ _______________.
-technology, product curves
fixed cost
-the cost of the firm's fixed inputs -do not change with the quantity of output
variable cost
-the cost of the firm's variable inputs -do change with the quantity of output
all decisions can be placed in two time frames
-the short run -the long run
an increase in *variable cost* shifts the total cost (TC), average total cost (ATC), average variable cost (AVC), and marginal cost (MC) curves ______________, but does NOT shift ______________, ______________.
-upward, fixed cost (FC), and average fixed cost (AFC) curves
an increase in a *fixed cost* shifts the total cost (TC), average total cost (ATC), and average fixed cost (AFC) curves _______________, but does NOT shift the ______________, _______________, ___________________.
-upward, marginal cost (MC) curve, variable cost (VC), and average variable cost (AVC)
for farmer jack, VC equals...
-wages he pays to workers (2000 per worker) -the more whet he needs to produce, the more workers he needs to hire, the higher variable cost
why is ATC U-shaped
1. spreading fixed cost over a larger output- AFC curve slopes downward as output increases 2. eventually diminishing returns- the AVC curve slopes upward and AVC increases more quickly than AFC is decreasing -in addition, the ATC falls at low output levels because AFC is falling quickly
TRUE OR FALSE long- run factors cannot be easily reversed
TRUE
TRUE OR FALSE short-run decisions can be easily reversed
TRUE
the short run definition
a time frame in which the quantity of one or more resources used in production is *fixed*
increasing marginal returns
arise from increased specialization and division of labor
when marginal product *is below* average product...
average product decreases
when marginal product *exceeds* average product...
average product increases
when marginal product *equals* average product...
average product is at its maximum
a firm experiences economies of scale up to some output level. beyond that output level, it moves into ______________
constant returns to scale or diseconomies of scale
diseconomies of scale is also called
decreasing returns of sale
average product labor
equal to the *total product* divided by *the quantity of labor* employed
when AP is rising, AVC is _____________
falling
when MP is rising, MC is ______________
falling
to increase output in the long run...
firm can change its plant as well as other factors
average fixed cost (AFC) equation
fixed cost/quantity of output
total product curve
how total product changes with the quantity of labor employed
these three curves decrease first, then begin to _______________
increase
the AFC curve always decreases as output _________________
increases
firms can decide to change its plant (fixed factors) in the ______________ ___________
long run
Farmer jack's cost -when farmer jack hires more workers, his output rises by.... -if jack pays *1000 for land* the wage for one farm work is ....
marginal product -2000
the height of each bar (on the graph) measures the _______________.
marginal product of labor
AVC is at its maximum at the same output level at which AP is at its ___________________
maximum
MC is at its minimum at the same output level at which MP is at its ________________
maximum
if the LRAC curve is U-shaped, the minimum point identifies the ______________
minimum efficient scale output level
total cost increases as ______________ increases
output
variable increases as ______________ increases
output
fixed cost is the same at each ____________ ___________
output level
the firm makes many decisions to achieve its main objective ___________ _____________.
profit maximization
firms can decide to change its variable factors, such as labor, in the _____________ ___________
short run
each scale has its own ________________
short run ATC curve
marginal product of labor definition
the *change in total output* that results from a one-unit in the quantity of labor employed, with all other inputs remaining the same
total product definition
the *total output* produced in a given period
to increase the output in the short run, a firm must increase ________________.
the amount of labor employed
total cost
the cost of *all* resources used
average total cost definition -equation
the cost of a typical unit of output produced. the mean value of the total cost -equation: total cost/quantity of output
to increase output in short run....
the firm must increase the quantity of variable factors
we call the fixed factors _____________ -in the short run, it is
the firm's plant -in the short run, the firm's plant is fixed
diminishing marginal product of capital definition
the increase in output resulting from a one-unit increase in the amount of capital employed holding constant the amount of labor employed
marginal cost (MC) -equation
the increase in total cost that results from a one unit increase in total product -equation: MC= TC/Q
law of diminishing returns
the property whereby the marginal product of an input declines as the quantity of that input increases -EX: as jack hired more and more workers, each additional worker has less land, has to share equipment, and will be less productive with the crowded working conditions -marginal product declines eventually -the production function becomes flatter as number of workers increases
scale
the size of the production process -if the business is expected to grow, firm can ramp up production -if the business is faltering, firm can scale back its operation -a *long-run time horizon* allows a business to choose a scale of operation that best suits its needs --however long it would take to vary all costs
minimum efficient scale is
the smallest quantity of output at which the long-run average cost reaches its lowest level
the long run definition
the time frame in which the quantities of *all* factors-including the plant size-can be *varied*
equation of total cost
total cost= fixed cost + variable cost
as the quantity of labor employed increases....
total product (TR or Total output): increases marginal product (MP): increases initially... but eventually decreases
average variable cost (AVC)
variable cost/quantity of output